Cost of deglobalisation is a more expensive and less innovative world
|Published
By Donald MacKay
WHEN we think about globalisation it’s usually either about hundreds of millions of poor, mostly Chinese, people who were lifted out of poverty or the number of jobs lost in the domestic economy because those jobs have been moved elsewhere, usually to China.
Little is spoken of how many things consumers have which improve their lives, which are only affordable because of globalisation. Although the iPhone was conceived of in the US, almost no one would be able to afford an iPhone if it was also made in the US. The point is taken, that even when it’s built in China, almost no one can afford it anyway.
At its simplest, globalisation means that everyone who produces a product is potentially in competition with the whole world, and competition is what drives innovation. Monopolies are low innovation environments because why would they care what their client thinks.
They can only buy from you. You don’t have to keep improving for as long as you have no competition. This is most obviously demonstrated by South Africa’s failing state-owned enterprises (SOEs), specifically Transnet.
Transnet simultaneously runs some of the worst performing and most expensive ports in the world. This has become so bad that people would rather clear goods though ports in Mozambique and Namibia and then truck them into South Africa than attempt to deal with Transnet ports. No one looks to Transnet to be innovative, and even Professor Mariana Mazzucato, doyen of the idea of the innovative state, may struggle to make her case when considering South Africa’s SOEs.
As the world starts to slowly, and then more rapidly, pull apart behind terms like re-shoring, friend-shoring, industrial policy, and localisation, the first really large casualty will be innovation and the cost of that will be disproportionately borne by the poorest nations.
The impact of a cellphone on your life is significant, but the impact of a cellphone on a poor farmer in Chad is orders of magnitude greater. Competition forces businesses to innovate and if they can’t, they fail, which is horrible for the company, but good for the market. This is how new ideas and technology emerge.
The economist Joseph Schumpeter referred to this as creative destruction and it is the cornerstone of human development. The Soviet Union with its army of central planners couldn’t competitively produce a pair of jeans. In 1975 the Ministry of Light Industry attempted exactly that, but the jeans were of low quality and few people were interested. It turns out jeans are a response to consumer demand and cannot be created ‘from the top’.
An optimal supply chain is typically the cheapest way to move goods from one place to another. If a long chain results in a cheaper supply, then this will be preferred, but the risk on longer supply chains is becoming apparent.
The US, arguably, has been the world’s second biggest beneficiary of globalisation, allowing citizens of that country to be economically successful in a way no country has in history. Yes, I know there is poverty in the US, but no person in the US lives like a South African in a squatter camp, so even in poverty the differences are stark.
Without the US being the policeman of the seas, globalisation would simply not have happened at the scale it did. When the Houthis are firing rockets at ships, we don’t see the Chinese navy doing something about it, in part at least, because they don’t have ships able to reach any corner of the globe. Only the US does.
If Donald Trump wins this year’s election to become the US president, there is a real possibility of the US reducing its role in policing the oceans and, if that happens, moving cargo by sea will become more expensive.
The optimal supply chain will be different and perhaps shorter. This might be the only reason why localisation would work.
Ironically, the US will be the least affected by this. It is the only country able to almost completely withdraw from the world. It has oil, a very good population-to-arable land ratio, secure borders with pleasant neighbours and home to most of the world’s most innovative companies. If you consider the whole of North America, you find something very close to a perfect insular society. Of course, this a terrible and very expensive idea.
With the loss of efficiency, prices will rapidly rise but as much as they would rise in the US, the impact on the rest of the world will be orders of magnitude greater. China would be devastated and, while not sent back to Mao levels of poverty, would certainly be terribly harmed.
Even if the US does nothing different, the wars around the globe are already inflating supply chains costs and it’s hard to see how this doesn’t get baked into the system, keeping global inflation higher than it should be. This is not good for anyone, especially the world’s poor.
Donald MacKay is the founder and CEO of XA Global Trade Advisors. He has been advising both local and foreign companies on global trade issues for over two decades. X handle: XA_advisors; email: donald@xagta.com; website: xagta.com
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